Ethics in the workplace: why bad business is bad for business

Focusing on just profit and loss makes the business environment worse for all concerned

Business schools inculcate an attitude that there is little more imporant than keeping your profits high and your losses low. Maximising shareholder value is the name of the game, and pesky corporate ethics - and even the law, if you think you can get away with it - must be jettisoned if they get in the way. But this isn't just bad for society; it may harm the very foundation on which economics rest.

Although ethics courses are taught in business schools, a recent Bloomberg op-ed by University of Chicago Business School professor Luigi Zingales points out that they are treated very much as secondary subjects, tought by low-ranking professors, perpetuating the idea "that ethics are only for those students who aren’t smart enough to avoid getting caught."

And it gets worse. The overwhelming push to view everything in cold monetary terms leaks into other courses where it is absolutely inappropriate. Zingales writes of a collegue, Gary Becker, who teaches the economics of crime. Comparing the expected value of success to the cost of punishment multiplied by the chance of being caught results in many crimes looking like quite good uses of your time (although not bank robbery, which, a recent paper in Significance magazine showed, only pays around £12,000 while resulting in jail in around a fifth of attempts). But Becker's students took that descriptive model as prescriptive: "They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity," writes Zingales.

It's not hard to see the direct link between the prevailing attitude at business schools and the recent actions of HSBC, which just admitted in a Senate hearing to transporting $7bn from Mexico to the US, ignoring "red flags that the volume of dollars included proceeds from illegal drug sales in the United States". HSBC clearly took a view of the potential profit and loss that could be made by weakening their adherence to money laundering regulations, and decided that the trade-off was worth it, without taking into account the broader societal reasons why those regulations are a good idea.

But even if they decide that it's not the best idea to act criminally, it's still problematic if we have a class of high-powered business people who think that ethics is for weaklings. Focusing too hard on the black and white difference between illegality and legality erodes all the shades of grey between "things you should do" and "things you shouldn't do". You aren't allowed to use slave labour to build your products in Britain, but is that really the only reason you shouldn't? That line of thinking often results in desperate attempts to prove that things which are undesirable are also unprofitable, leading to arguments that slavery is unprofitable, or BP would make more money if they stopped drilling up oil. Those things may or may not be true, but do we really want to base our prescription of how business should behave on changeable facts? If it suddenly became profitable to own slaves – say we find a really good way of making Battle Royale-style control collars – does that make it OK?

The fact is, the general undercurrent of ethics that we all live our lives by does extend to businesses. Any one of us could, if we wanted, steal from a hundred unattended coats, bags and desks every day, but we don't. Nor do we only keep promises when we have signed contracts, or only tell the truth if there is regulation making us do so. Similarly, many businesses have ample opportunities to, both legally and illegally, increase their profit. You can hold off paying invoices until you are served notice, encourage interns to work for free – or pay to work – and just generally be nasty. And while some don't take them, a growing number do.

A survey from "whistleblower law firm" Labaton Sucharow showed that 24 per cent of senior executives in US and UK finance said they believed "financial services professionals may need to engage in unethical or illegal conduct to be successful". We can safely assume that the number who believe that they need to engage in unethical but not illegal conduct is higher still.

But if you end up with a business system where a large proportion of people are acting unethically, then things slowly fall apart. Everyone starts lawyering up, as "verbal contracts" and "gentlemen's agreements" are replaced with real contracts exhastatively negotiated. What were ethical obligations become legal obligations, and where the legal system can adapt fast enough, it jettisons the parts that are holding it back.

Take, for example, the "charity tax". The idea of using the tax system to reward philanthropy is something which, on the surface, makes sense. But then individuals who believe that they have a moral obligation to pay as little tax take advantage of it, the charities commission is forced to crack down on "fake charities" and eventually, pressure hits the government to remove the exemption.

The same pattern happens time and again. The safe-harbour exemption in copyright law is there to enable sites with user-generated content to exist; but it gets abused to justify wilful piracy, and SOPA is introduced in an attempt to remove it. "Carried interest" allows American investors to not pay full income tax on capital gains, but hedge fund managers abuse it to pay themselves tax free, and the "Buffet rule" is suggested. And the BBA allows banks to self-report their rate of borrowing, until Barclays mis-reports their rates for financial gain and ideas for post-Libor regulation involve billion-dollar mandatory loans.

Bad business is bad for business. In the long run, either they tighten up, or they force the law to do it for them.

J.S. Mill, ethicist and philosopher. Could businesses learn from him? Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR